On January 1, 2014, Park Corporation sold a $620,000, 6 percent bond issue (8 pe
ID: 2446236 • Letter: O
Question
On January 1, 2014, Park Corporation sold a $620,000, 6 percent bond issue (8 percent market rate). The bonds were dated January 1, 2014, pay interest each June 30 and December 31, and mature in four years.
Required
1. Prepare the journal entry to record the issuance of the bonds
2. Prepare the journal entry to record the interest payment on June 30, 2014. Use effective-interest amortization.
3.Show how the bond interest expense and the bonds payable should be reported on the June 30, 2014, income statement and balance sheet
2. Prepare the journal entry to record the interest payment on June 30, 2014. Use effective-interest amortization.
3.Show how the bond interest expense and the bonds payable should be reported on the June 30, 2014, income statement and balance sheet
Explanation / Answer
The market rate on the date of issue of bonds is 8% while the stated rate of bonds is 6%. This shows that the return provided by the bonds is less than market investments and thus, the bonds shall be issued at discount.
Under effective interest amortisation method, the discount on issue of bonds shall be amortised over the life of bonds in proportion of the effective interest calculated on the carrying amount of bonds.
1.
Issue price of bonds = Present value of Interest payments payable semi-annually for 4 years+ Present value of face value of bonds payable after 4 years
Semi-annual interest payments = $620,000 * 0.06 *1/2 = $18,600
Present value of interest payments = $18,600 (1-1/1.048)/0.04 =$18,600(1-0.7307)/0.04 = $125,224.50
Present value of face amount of bonds = $620,000/1.048 = $620,000 / 1.3686 = $453,017.68
Issue price of bonds = Present value of interest payments + Present value of face amount of bonds
= $125,224.50 + $453,017.68 = $578,242.18
Discount in issue of bonds = $620,000 - $578,242.18 = $41,757.82
Journal entry to record the issuance of bonds
2. Amortization schedule can be drawn as below:
Bond discount Amortization Schedule
Number of payments
Date of Payment
Interest payment @ 6% per annum'
Bond Interest Expense
Discount Amortization
Unamortized Discount
Carrying Value of Bond
0
01-01-2014
41,757.82
578,242.18
1
01-07-2014
18,600.00
23,129.69
(4,529.69)
37,228.13
582,771.87
2
01-01-2015
18,600.00
23,310.87
(4,710.87)
32,517.26
587,482.74
3
01-07-2015
18,600.00
23,499.31
(4,899.31)
27,617.95
592,382.05
4
01-01-2016
18,600.00
23,695.28
(5,095.28)
22,522.67
597,477.33
5
01-07-2016
18,600.00
23,899.09
(5,299.09)
17,223.57
602,776.43
6
01-01-2017
18,600.00
24,111.06
(5,511.06)
11,712.52
608,287.48
7
01-07-2017
18,600.00
24,331.50
(5,731.50)
5,981.02
614,018.98
8
01-01-2018
18,600.00
24,560.76
(5,981.02)
(0.00)
620,000.00
Totals
148,800.00
190,537.56
(41,757.82)
2. Journal entry to record the interest payment on June 30, 2014
3.
PARK CORPORATION
Income statement (Partial)
For the year ended June 30, 2014
Bond Interest expense
$23,129.69
PARK CORPORATION
Balance Sheet (Partial)
At June 30, 2014
Long term liabilities
Bonds Payable
$582,771.87
Date Account title Debit Credit January 1, 2014 Cash $578,242.18 Discount on issue of bonds $41,757.82 Bonds payable $620,000Related Questions
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